Those familiar with the housing industry may have come across a strategy that is gaining in popularity. Otherwise known as the buy, fix and refi, this method focuses on acquiring a distressed property with cash. The property is then rehabbed and refinanced with a conventional mortgage loan to recoup any capital that may have been lost. This is a real estate investing strategy that has become increasingly popular in the new housing boom, especially among those new to the game. While potentially highly profitable, however, it comes with dangerous pitfalls for those that have neglected to invest in their real estate education.
So where are the potential snags, how can they be avoided, and how can this strategy be improved upon for lowering risk and increasing your return on investment?
As with any investment strategy, this particular method requires a certain degree of aptitude. Familiarizing yourself with the ins-and-outs of the “Buy, Fix and Refi” can reduce potential risks. Those you may want to look out for include: failing to budget enough for remodeling or calculating the after repair value incorrectly.
This can lead to a shortage of funds, or worse, running out of cash to complete repairs and being stuck with an uninhabitable property. Such a property is unable to be rented and prevents investors from obtaining their desired cash flow. With better due diligence, research and budgeting, these problems can be avoided.
While miscalculations are certainly an annoyance, end financing serves to be a major complication for investors of all levels. Many novice investors have recently found end financing to be particularly difficult. They misjudge the ability to cash out and end up stuck with high rate loans that crush borrowing costs and prevent them from generating equity.
However, while there are potential complications with the buy, fix and refi strategy, there are also ways of mitigating risks. Avoid them with a preemptive strike. Get pre-approved ahead of time, before mortgage stipulations change, and consult with loan officers to be alerted to potential issues and head them off early. Preparing yourself for what is to come may be the best option you have.
While real estate investing in San Diego can seem a lot easier when purchasing with cash, there are also advantages to using up-front financing. Utilize loans, as you can refinance after renovations have been completed with a better rate.